Post date: 01/02/2021 12:34
The ECB last week reacted in the usual belated fashion to the sharp rise of the euro and its potential effects on the Eurozone inflation and economic recovery. For now, the impact on the currency has been muted, but we expect to see many variations on the theme that currency has risen too much, too fast in the coming weeks, which introduces short-term downside risks for the euro. All G10 currencies lost ground against the dollar save sterling, buoyed by the UK’s fast progress in vaccinating its population.
Emerging market currencies were mixed, but overall they withstood fairly well the significant sell-off stocks and risk assets in general. The short squeezes in some stocks like GameStop have provided plenty of entertainment and lush news coverage but we expect the impact on currency markets to be negligible, given the much larger volumes and limited retail investor access to these markets.
We think that markets will focus on macroeconomic data this week. The Eurozone calendar is busy, with fourth quarter GDP growth released on Tuesday and January inflation on Wednesday. The former is expected to be negative, while the latter should rebound on technical factors in Germany, namely the reversal of a temporary reduction on German VAT and higher energy taxes. In the US, the February meeting of the Bank of England will held on Thursday. Finally, the US January job market report out Friday will also be closely watched.
The UK is vaccinating people faster than any other major country, and we believe this is one of the main reasons why are seeing a relative outperformance of sterling against the euro in the last few weeks. Last week was no different, and sterling rose against every other G10 currency. The pound is currency top of the year-to-date G10 performance tracker with the euro, which has been lagging well behind in its vaccination efforts, near the bottom. Thursday’s meeting of the Bank of England should be a non-event, and the MPC will vote unanimously to stay on hold and keep its options open. We expect the pound to continue to trade well as the prospect of an end to the lockdowns draws closer.
Eurozone central banks in the Netherlands and Finland expressed their discomfort with the speed and extent of the recent euro rally last week – expect to see more of this in coming weeks, which could present a downside risk to the euro in the near-term. Poor economic data this week may outweigh on the common currency, as will continued subpar performance on the vaccination front. We expect to see a sharp on-off rise in the Eurozone inflation this week, largely due to technical factors in Germany. Markets should pay attention to the preliminary fourth-quarter GDP growth data on Tuesday. We think that there is room for a downside surprise in the data and we may see a bout of euro weakness as a result.
The recent negative correlation between dollar performance and risk assets weakened this week. While stocks worldwide tumbled, the US dollar failed to rally significantly against most other currencies. The key payrolls report for January comes out on Friday. Markets are expecting an essentially flat report, both in terms of the unemployment rate and the number of jobs created or lost in January. The lack of historical precedent makes it harder than ever to make a prediction, but we are on the side of a positive number given the absence of generalised lockdowns in the US in January. In the meantime, Wednesday’s services PMI from ISM could receive some attention among currency traders.